Whether you pay stimulus tax depends on the type of benefit.
- Most sources of stimulus funds are not taxable.
- The exception concerns unemployment benefits.
Most of us have received pandemic-related aid in the past two years. And as we scramble to file our 2021 returns, it leaves many of us wondering if any of these funds are taxable. Will we receive a lesser refund, or even worse, owe money?
Here we take a look at the latest stimulus checks, the $1,400 checks that started hitting bank accounts in March 2021. However, we also include other COVID-related financial relief, including advanced credit card payments. child tax, increased unemployment benefits and SNAP emergency benefits.
Last spring, millions of Americans received stimulus checks of up to $1,400. These recovery funds are not taxed.
According to the IRS, “No, the third economic impact payment is not included in your gross income. Therefore, you will not include the third payment in your taxable income on your 2021 federal income tax return or pay tax on the third payment.”
Unfortunately, there seem to be internet rumors circulating by people who believe they are in fact being taxed on stimulus checks. If you come across such inaccurate information, just ignore it.
At the end of the line : If your tax bill is higher than usual this year, there’s another reason for it. Stimulus checks are not taxable.
Advanced child tax credit
Most U.S. families with children received monthly Advanced Child Tax Credits in 2021. These payments ranged from $250 to $300 each (depending on the age of the child) and arrived in bank accounts through the country from July to December.
Like stimulus checks, Child tax credit payments are not taxable. If you find that your refund is lower than normal this year, it may help explain why:
- In a “typical” year, you receive a credit of $2,000 per eligible child. If you have three children, that’s a $6,000 credit.
- Let’s say your three children are 6, 8 and 10 years old. Thanks to the American bailout, the total credit was increased to $3,000 per child. If you received $250 per month between July and December 2021, you have already received $1,500 of the $3,000 owed ($250 x 6 = $1,500).
- You claim the other half of the child tax credit on your 2021 tax return. In other words, you claim a credit of $1,500 per child rather than the $2,000 you would normally file for. So instead of receiving a credit of $6,000 this year, the maximum you receive is $4,500.
- Although it may seem like you are “overdrawn”, you actually have money in front of you. In an average year, you would have received $6,000 for three eligible children. Due to the advanced child tax credit, you will receive $9,000, but not as much as normal at tax time.
At the end of the line : If you receive a lower refund, it may be because you received part of the child tax credit in advance. You pay no tax on advanced child tax credits.
For the 2020 tax year, Congress eliminated federal taxes on the first $10,200 of unemployment benefits. The same does not apply for the 2021 tax year..
About 25 million people applied for unemployment benefits in 2021. All 25 million must pay federal taxes on these benefits (as usual). Whether or not you owe state taxes on unemployment benefits depends on the state in which you live.
The states below are not subject to any state income tax, exempt unemployment benefits from their state taxes, or tax only a portion of unemployment benefits. Make sure you understand the rules for your state.
State tax category
States that have no income tax
Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming
States That Exempt Unemployment Benefits at Tax Time
Alabama, California, Montana, New Jersey, Pennsylvania and Virginia
States that tax part of unemployment benefits
Indiana and Wisconsin
Data source: Tax Outreach
If you received unemployment benefits in 2021, you should have already received a Form 1099-G showing the amount you received and the amount withheld for taxes.
Learning that taxes are owed can be unpleasant, aggravated if you are not working or have only recently returned to work. If your tax bill is too high right now, ask the IRS to pay the balance in monthly installments. A installment agreement is available online at the IRS website.
At the end of the line : If you received unemployment benefits in 2021, federal taxes are owed on those funds. Whether or not you have to pay state taxes depends on the state you live in.
SNAP, P-EBT and TANF Benefits
As a result of the COVID-19 outbreak, the USDA has granted waivers to states allowing emergency Supplemental Nutrition Assistance Program (SNAP) allocations. And in 2021, Congress extended the Electronic Pandemic Benefit Transfer (P-EBT) — a program designed to ensure children from struggling families get the nutrition they need. In addition, low-income families had access to the Temporary Assistance for Needy Families (TANF) program. These benefits fall under the non-taxable category.
At the end of the line : SNAP, P-EBT and TANF benefits are not taxable.
If you find that you owe more than expected or receive a lower refund than you expected, review your taxes again. Make sure that none of the non-taxable benefits are included in income.
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